SEC report recommends regulation of hedge funds

September 26, 2003|By Bloomberg News.

WASHINGTON — The Securities and Exchange Commission staff is set to recommend that hedge fund managers be required to register with the SEC, according to people familiar with the staff's report on the $600 billion industry.

Under the proposal, the SEC would for the first time get the authority to audit these largely unregulated investment pools. SEC Chairman William Donaldson has said the funds control too much money to be exempt from agency oversight.

Requiring registration would open hedge funds to routine SEC inspections. Currently, the SEC's responsibility is largely limited to investigations of fraud at the funds.

"We would be very pleased to see any move by the commission to require registration and some level of transparency," said Damon Silvers, associate general counsel at the AFL-CIO, whose union members' benefit plans represent $5 trillion in assets.

"Not only are hedge funds unregulated, they are unobserved. And our markets really live on transparency."

SEC spokesman Herb Perone declined to comment on the staff report. The report's recommendations would have to be approved by a majority of the five-member commission.

The number of hedge funds has more than doubled in the past five years, according to investment consulting firm Tremont Advisers, to about 6,000 funds from about 2,500. Since 1990, their assets have climbed from $50 billion.

The SEC staff recommendation, which follows a 15-month fact-finding investigation, may be released as early as Monday, the people familiar with the report said. The sources said the report still may be changed.

The plan for greater oversight is opposed by some industry representatives and at least two Republicans on the five-member SEC--Paul Atkins and Cynthia Glassman--who aren't convinced the SEC should regulate hedge funds at all, sources said.

"A strong case can be made that registration for hedge fund managers is not necessary, and I would hope that both the staff and the commissioners would agree with that," said John Gaine, president of the Managed Funds Association, a hedge fund industry trade group.

Donaldson, a Republican, has voiced concern about hedge fund fraud since he took the SEC's helm in February. In 2002, the agency charged 12 funds with fraudulent practices, the same number as in the three previous years combined.

"It's hard to tell exactly what is going on inside some of these funds," Donaldson said in May while testifying before a congressional subcommittee.